You are on page 1of 77

BANKER CUSTOMER RELATION

BANKER

Halsbury law of England A banker is an individual, partnership, or corporation, whose sale or predominating business is banking, that is , the receipt of money on current or deposit account and the payment of cheques drawn by and the collection of cheques paid in by a customer

Supporting

the view Sir John Paget pointed out that, no person or body, corporate or otherwise, can be a banker who does not (1) take deposit accounts (2) take current accounts (3) Issue and pay cheques and (4) collect cheques crossed or uncrossed for his customers. Dr. Herbert L.Hart A banker is one who in the ordinary course of his business, honours cheques drawn upon him by persons from and for whom he receives money on current accounts

CUSTOMER
Dr.

H.L Hart A customer is one who has an account with a banker or for whom a banker habituality undertakes to act as such In simple words, a customer is a person with whom the banker has some regular and formalized banking business The nature of transaction should be of that of banking and he shoule be regular.

Old View DURATION THEORY - Sir John Paget


According

to this theory the following 2 condn has to be satisfied:


between him and the bank The transaction should be of the nature of regular banking business i.e., frequency of transaction should be there. This theory emphasis on the continuity of transaction and a single transaction is not sufficient
There should be a habit of dealing

MORDERN VIEW REJECTION OF DURATION THEORY


The

theory was over ruled by Mr. Justice Bailhache in the Judgment :


Ladbroke v. Todd,1914 In the present case, it was pointed out that the relation bw the customer and the banker commences immediately when the account is opened and a paticular duration for the same Is not an essence.

The

Banker customer relation are of different kind and it depends upon the nature of transaction and the function carried out by the bank.

1. Debtor Creditor
The Primary relation between that of the banker and customer is that of debtor and creditor. The moment an account is opened in the bank, the banker becomes the debtor to the customer, who then becomes the creditor. Shanti Prasad Jain v. Director of enforcement, foreign Exchange ,1963 was held that the banker and customer relation in respect of money deposited in the account of the customer with the bank is that of the debtor creditor.

In

Foley v. Hill, 1848 Sir John Paget said that, the relation between the banker and the customer is that of the debtor and creditor, the respective positions being determined by the existing state of account. It is not just money kept in the safe custody rather it is money due from the banker. The banker is a creditor as long as there is credit in the account of the customer. This relation is reversed as long as the account is overdrawn. And also in case where loan is drawn from the bank.

PRIVILEGED DEBTOR
The Banker is in a better position than the commercial debtors as the relation between the banker and customer is of such a nature. For this reason the banker is know as PRIVILEGED DEBTOR

1. Unlike in the ordinary case where the debtor approaches the creditor, the bank does not approach the bank but the customer approaches the bank with the money and thereby the relation is created. 2. Unlike the commercial debts, the debtor is not due to make the repayment until the creditor demands the refund. This is due to the special relation of the banker customer. The debt is struck by limitation only from the date it is demanded. As held in Joachinson v. Swiss Banking Corporation,1921 : Express demand of repayment of money is essential. It must be in writing.

3. In case of oridinary commercial debt, the debtor can make the repayment to the creditor at any place and at any time. But in case of bank debts, it can be made only in the particular branch where the party has the account . Clare & Co v. Dresdne Bank , 1915 The plaintiff had an account at Berlin Branch of D Bank, which had its head office in Germany, and a branch in London. They made a demand for repayment at the London branch without making a request at Berlin bank. And on refusal, they sued the London bank. In the matter court hels that, the debt due by the banker to the customer is from the Berlin Bank, and it is only payable from that particular branch and nowhere else.

But the customer may make special arrangements with the bank to make the payment at anyother branch, eg thru DD, Cheques etc. Indo-Allied Industries Ltd. V. Punjab National Bank Ltd, 1970 All.HC , Unless there is an express agreement to the contrary there is an implied agreement for the bank to make the repayment to the customer only at the bank concern and the respective branch and no where else. THE SITUATION HAS CHANGED WITH THE INTRODUCTION OF ATMs. IT CAN BE REPAYED ANYWHERE.

4. In case of ordinary debt, the timings for claiming the repayment is not specified, it can be made at any time of the day, but in case of the banker- customer, it can be reclaimed during the business hours as laid down statutorily. Arrab Bank v. Barclays Bank ,1954 : The bank is only duty bound to honor a cheque , only if it presented during the banking hours.

5. In case of commercial debt, the debt can be withdrawn through orally asking or through acknowledgement. But in case bankers debt, it has to be done through, Cheques, drafts, orders or otherwise. 6. S.22 of limitation Act, which points out that , a debt, after the expiry of 3 yrs becomes a bad debt from the date the money is paid. But this is not applicable in case of banking as, the date is calculated from the date of demand and not the date of deposit. In case of bank practically, banks makes immediate repayment and for that matter , this law is not applicable.

7.The ordinary debtor can close the debt at any time, but a banker cannot do that with out getting the prior approval of the creditor. 8. In ordinary case , there maybe failure on part of the debtor to repay the amount, but in case of banks, they make the payment immediately.

SECONDARY RELATIONS

2. PRINCIPAL - AGENT
The banker also acts as an agent for its customer. S.182 of the contract act defines Agent as An agent is a person employed to do any act for another or to represent another in dealing with third persons. The person for whom such act is done, or who is so represented, is called the Principal. Agency in broad sense includes every relation where one person represents another by his authority.

This

is one important relation the banker and customer has. In the course of business, the banker acts as the agent for the customer in no. of services. On behalf off. They include :
1.Buying and selling securities on behalf of the customer 2.Collection of cheques, dividend warrants, bills of exchange, promissory note etc. 3.Acting as trustee, attorney, executor, correspondent or a representative for the customer. 4.Payment of insurance premia, telephone bills etc. 5.

While

dealing with these, the banks is to conduct the business with the due deligence of person engaged in similar business. The law of agency applies in the present relation. In case of agency the rules laid down in the Indian contract act applies, such as S.211, where the bank is to carry on the business as directed by the principal (customer) and in the manner prescribed. The profits are to be accounted for. S.212, to carry on with the due deligence. etc

Tranvancore National & Quilon Bank, Case 1940 : Where A remitted certain amount with the bank as a telegraphic transfer to a company in Bombay. It was held that the amount was held by the bank on behalf of A and they were holding it merely as an agent. Bharat bank Ltd. V. Kashwap Industries, 1958 The Plaintiff sold certain goods to third party and sent the documents to collect the D bank, who was acting as an agent, within 10 days. The D bank delayed the transaction and thereby caused loss to the P. SC held that D bank was liable to make the payment for the loss as he was to act in due deligence as an agent.

3. FIDUCIARY RELATION
The

fiduciary relation is of different types. It is a relationship of trust and confidence. The bank receives the money with the trust and coinfidence and there is an implied requirment not to alienate the money otherwise than with the permission with of the customer.

In

First National Bank Ltd v. Pioneer Commercial Bank, 1951, when a bill are send to the bank for collection and the bank is directed to issue a draft. And the bank fails to issue the same, the customer has the right to claim it on the basis of trust.

4. TRUST- BENEFICIARY
S. 3 of Trustee Act,1882 defines Trustee as one to whom property is entrusted to be administered for the benefit of another Beneficiary is one who is beneficially entitled to or interested in property, that is, entitled to it for his/her own benefit and merely as trustee or executor holding ot for others. They are entrusted to the benefit of the property held by the trustee. The trustee is to take care of the property with due deligence and as his own. And not to take improper adv. Over the property

Such relation arises on the banker under certain circumstance. In ordinary course of business, banker holds the property as the debtor, but in case it is given for a specified purpose or for a specified period of time, such as in case to keep in safe custody, he holds as a trustee. THIS IS DETERMINED ON THE BASIS OF THE SPECIFIED INSTRUCTION GIVEN BY THE CUSTOMER TO THE BANKER. New Bank of India Ltd. V. Pearey Lal,1962 There general presumption that arises of the relation between banker and customer is that of the debtor- creditor,

5. Bailee - Bailor
The Bailee is the party of whom the personal property is delivered under a contract of bailment. Bailor is the party who bails or delivers goods to another under the contract of bailment. S.148 of the Indian Contract Act deals with Bailment which states as A bailment is the delivery of goods by one person to another for some purpose, upon a contract that they shall, when the purpose is accomplished, be returned or otherwise disposed of according to the directions of the persons delivering them

In

exceptional case, the banker acts as the Bailee, i.e., in case of safe custody of gold or documents, where the bank is not permitted to take advantage of the items as they are obliged to return the identical goods. They do not pay the interest, but the customer pays the rent for the locker. This is the only circumstance when the banker acts as a bailee.

DUTIES
1. DUTY TO TAKE REASONABLE CARE : When a banker accepts an item for safe custody, he is required to exercise reasonable care and duty over the property. Under s.151. but under S.152 exempts the liability in respect of loss, destruction or deterioration of the goods bailed, if the required care has been taken. Central Bank of India v. Grains & Gunny Agencies,1989 where there is an agreement exempting the bailee from the liability in case of not rendering reasonable care. ia a valid agreement and is a valid exemption

2. DUTY NOT TO MAKE UNAUTHORISED USE OF GOODS BAILED : The banker, as bailee is not to make use of the goods other than for the particular purpose for which it has been deposited for. Otherwise, the bailment maybe terminated as per S.153 of the contract Act and liable to compensate as under S.154 for the damages.

3. DUTY NOT TO MIX BAILORs GOODS WITH HIS OWN GOODS : The Bailee may mix the goods with the consent of the Bailor and their will have the right over the goods with respect to the respective proportion as under S.155; If mixed, with out consent, S.156 is attracted. If the goods are severable , the bailee has to sever it bearing the expense, or pay the compensation (s.157)

4. DUTY TO RETURN THE GOODS ON THE FULFILMENT OF THE PURPOSE : S.160 and S.161 deals with this. As soon as the purpose has been fulfilled the goods are to be returned with out fail.

RIGHTS
1. RIGHT TO RECOVERY NECESSARY EXPENSES INCURRED ON BAILMENT: S.158, the bailor shall pay the bailee the expenses incurred on the goods on the course. 2. RIGHT TO RECOVER COMPENSATION FROM THE BAILOR: S.164 , in case of any loss incurred while dealing with goods, bailor is liable to pay the compensation

3. RIGHT OF LIEU OVER BAILED GOODS: The banker has the right to retain the goods bailed until certain conditions are fulfilled

4. RIGHT TO SUE AGAINST WRONGDOER: the banker has the right to sue against the wrongdoer

6. Lessor - Lessee
When

a property is kept in the custody of the banker, there arises the relation of the lessor and lessee . This is in case of safe custody. In case of safe custody, the Banker will not be aware about the content of the locker and cannot be held liable against the loss. The liability is same as that of a lease deed.

Earlier

position with respect to the lessee lessor relation was that of bailee bailor, and banker was liable for the loss. But this position changed by National Bank of Lahore v. Sohan Lal, 1962 and later in Atul Meher v. Bank of Maharastra,2002 ; Court held that there is no relation of bailment in case of safe custody, but arises the relation of the lessee and lessor and the liability of the banker is only to the extend of negligence.

SAFE CUSTODY OF CUSTOMERS VALUABLES

Bankers Responsibility
1. To maintain a book to issue receipts to the customer relating to safe custody deposits 2. A specimen signature to be obtained 3. Banker has to enter the particulars of item deposited into the register with specifications. 4. The customer may withdraw the articles by surrendring the receipts with the bank. 5. In case of using the locker, a register has to be maintained with respect to that. And entries of date, time of entering etc have to be maintained.

Liability of Banker with safe custody


1. Liable for any loss of any security deposited with him. 2. Liable for unauthorized conversion. 3. Liable for retaining the goods if he has no lien right over the goods. 4. Liable for the fraud committed by the employer.

7. Pawnee- Pawnor
A pawn

is defined as a bailment or delivery of goods by a debtor or his creditor, to be kept till the debt is discharged. This is for the security of the money borrowed. Pawnee is a person with whom a pledge for payment of money is deposited; Pawnor is one who make the deposit. Pawn is the thing deposited.

8. Mortgagee- Mortgagor
The

transfer of interest in specific immovable property for the purpose of securing the payment of money advanced or to be advanced. Mortgagor is the person who extends the property. Mortgagee is the person to whom it is extended.

8. BANK AS GUARANTOR
Bank

guarantors gives guarantee to its customer by issuing the letter of Credit This is mostly used in International trade and transaction They guarantee to make the necessary repayment on the failure or default on the part of the other party. State Trading Corporation of India Ltd v. Jainson Clothing Corp. 1994

GENERAL OBLIGATIONS

1. Honour of Cheques
The

banker is under the statutory duty to honour the cheque. He accepts a deposit with the obligation to repay the same on demand. S.31 of the NI Act, entrusts the bank with the duty and on failure, he is liable to compensate the loss

Condition to Honour the Cheque


1. Sufficient Balance : Which means there must be sufficient fund as submitted in the cheque. If not with the customer atleast with the banker. In case there is no sufficient fund with the customer, banker may permit overdraft. This maybe availed through the express or implied agreement. Indian Overseas Bank, Madras v. Naran Prasad Govindlal Patel, Ahmedabad , 1980 : it is not necessary to have an express or written agreement for overdraft. It is sufficient to have implied from the conduct of the parties. And once an agreement has been formed , it can be unilaterally terminated by the bank alone 2.

2. The cheque is to be presented with the working hrs of the bank and on the working day. 3. The cheque is to presented within a reasonable time period from the date on the cheque. It is to be given with 6 Months. The Banker is not honour undated cheque. 4. The Cheque is to carry the signature of the customer and it should tally with the specimen signature, that is with the banker. This is a mandatory principle but it is not a mandatory for the customer to write the cheque himself. In Keptigalla Rubber Estates Ltd. V. National Bank Of India Ltd., 1909 : In case the signature on the cheque is believed to be forged, the banker has to immediately stop the payment and intimate the same to the customer or else the banker will be held liable for his neglection.

5. It should be in the proper form and comply with the requirements of the law. 6. Mutilated cheques : it should be good in appearance and shouldnt be torned affecting any printed word on the cheque. In case of any correction or other , it should be dulu signed. 7. The amount should be correct in word and in figure. And this should be duly verified as required under S.18 NI Act. 8. The banker will permit the payment only it is for the proper application of the fund 9. The cheque is not to be honoured in case of legal bar 10. In case of reliable information that the customer is death, insolvency, the cheque or transaction is to be stopped. 11. In case of cheque of partnership or company, sign to be verified to see if it is signed by the authorised person and so with the seal.

BANKERS RIGHTS

1. Bankers right to General Lien


Lien

: Halsbury defines Lien as A right in man to retain that which is in possession belonging to another, until certain demands of the person in possession are satisfied The bankers right to retain the securities till the repayment unless there is an agreement to the contrary. Lien does not require a particular agreement in written or oral.

S.171

ICA confers general right to lien on the Banker. As held in Brando v. Barnet, 1864 Bankers most undoubtedly has the general right to lien over the property in the possession of the holder unless there is an express agreement to the contrary. There are four vital condition to be satisfied to exercise the general right to lien of the banker.

1. There must not be an agreement to the contrary 2. The property must come into the hands of the banker in the capacity as the banker 3. The possession must be one lawfully obtained as the capacity of the banker 4. The property shouldnt be entrusted for a particular purpose. Eg : Bill of exchange, bearer bonds, goods etc.

Exceptions :
1. General lien cannot be exercised on safe custody deposits, as he acts as a bailee and not in the capacity as banker 2. No Lien on securities, bill of exchange or other documents which are entrusted for particular or specific purpose [ Greenhalgh v. Union Bank of Manchester,1924] 3. Banker cannot exercise right to lien on properties which were left behind by mistake or negligently. In Lucas v. Dorrien, where the properties were refused to be taken as securities, but the customer mistakedly left it behind. Court held that the banker cannot exercise right to lien over these properties.

4.Banker cannot exercise right to lien on the deposit account of a customer with respect to loan advanced. 5. There is no lien until the due date of the loan arises as there is no debt till the amount is due. 6. No lien on the trust accounts, where the trustee is liable for his personal loan 7. The banker cannot exercise the right to lien on the title deeds of Immovable property.

2. Bankers right to set -off


This

is the legal right by which the debtor is entitled to take into account the debt owing to him by a creditor while paying a debt due from him to the creditor. This right is also available to the banker. In case the customer keeps 2 or more accounts, and few are overdrawn and other has credit, it can be adjusted accordingly.

Requirements for Set-off


1. The accounts must be in the same name and in the same right 2. The right of set-off can be exercised in respect of debts due and not future or contigient debts 3. Amount must be certain 4. It is exercisable in the absence of any agreement to the contrary 5. Banker may exercise his right to discretion 6. The right is before the garnishee order is made effective 7. A formal notice to the customer has to be given showing the bankers interest to set-off.

Cases where automatic right to set-off is exercised : a. On the death, mental incapacity or insolvency of customer; b. On the insolvency of a firm or on liquidation of a company c. On the receipt of a garnishee order d. On the receiving notice of a second mortgage over security charged to the bank.

3. Right to appropriation or RULE IN CLAYTONS CASE:


- This is when the customer owes two or more debts to the banker and the sum paid is not sufficient. In English law it is known as the Rule in CLAYTONS CASE and under the Indian Law, it is dealt under Ss. 59 to 61 of the Indian Contract Act. - This is the right of the banker to appropriate the sum paid by the customer to any of the loans due. But once specified directions are given by the customer, the banker is bound to follow the same. But once te amount is not appropriated, the banker may appropriate after informing the customer.

Indian Law
S.59 : Right to appropriate by the debtor s.60 : Right to appropriate by the creditor S.61 : Appropriation by law where neither party appropriates.

CLAYTONs RULE
CLAYTONs

rule is the rule laid down in Devaynes v. Noble ,1816 which held as:
Appropriation take place in the order of

time : the first item on the debit side gets cancelled by the first item on the credit side. Appropriation takes place in chronological order.

FACTS:

There was a partnership firm running the banking business. This had 5 Partners- Devaynes, Dwans, Noble, Craft and Barwook. Devaynes, who was a chief partner died during the course of business . The surviving partners continued the business in the old name of the firm despite the written notice from Devayness Son and from the trustees. It was that the name was continued to use without their consent. After abt a yr, the firm went into insolvency and the partners were paupers. It was argued on behalf of the living partners that the deceaseds estate must be made

as the firm was solvent when he (Devaynes) died. And since the firm was of unlimited liability , it carried on to the legal representative of the deceased. And also it was said that the amount in the account before the death of the deceased was same as the amount after his death and for this the rep. are to be made liable. But the arguments were rejected and court held that, unless there is an appropriation by the creditor or the debtor, the general presumption is that sum first paid was first drawn out and first item on the debt side is reduced by the first item on the credit side. Therfore the estate of deceased is not liable. As the old debts at the time of deceased was paid off by the subsequent payments of the firm.

Conditions

to apply the rule:

The account still be running. This doesnt apply

in case the account is broken and a separate account has been started. No agreement to the contrary.

This principle was applied in Croft v. Lumley,1858, Deelay v. Lloyds Bank Ltd, 1912 This is rule of evidence and rule of law.

4.Bankers right to claim incidental Charges:


The

banker may claim incidental charges such as processing fee, service charges and such other. Eg. While taking DDs, Transaction through different banks etc.

5. Bankers Right to Charge Compound Interest


This

is generally prohibitied, but this is the special privilege given to the banks. This was held in the following cases: Syndicate Bank v. M/S West Bengal Cement Ltd.,1991 Bank of India v. Rao Saheb Krishna Rao Desai,1980

CUSTOMERS DUTIES
1. The customer has the duty to repay the overdrawings made in the bank. 2. The banker has to be given the reasonable service charges and other bank charges by the customer 3. The customer has to inform the banker immediately if he finds out that another person has been accessing his account or forged his signature. 4. To render due deligence while using the cheques and making such entries. 5. Avoid drawing cheques when there is no sufficient fund in the account as it is a criminal offence

Termination by Customer
1. If the customer is not satisfied with the services of the banker or vexed with the behaviour of the bank officials 2. He cannot get the facilities from the banker 3. He loses his confidence in the bank or bank loses the reputation etc. 4. He doesnt agree with the terms of the bank, or such other , he may give it in writing

By Banker By Operation of Law


1. Death of the customer 2. Customers insanity 3. Customers insolvency 4. Order of the court 5. Customer assigns his account to another person 6. Winding up of the company or closing of the partnership firm 7. Customer of enemy country.

BANKERs and GARNISHEE ORDER


Garnishee

O.XXI, R.46 The Judgment Debtors debtor. He is directed by the court at the instance of the judgment creditor to make the payment to him and not to the debtor. This is the same case with the bank, where , bank is the third person and he is directed to freeze the accounts of the customer.

Garnishee

order is effective to the amt in the account at the time of making the order. In case of oridinary the whole bal is attacked. And in case of limited specified amount. Where the garnishee order doesnt apply, - eg in case of joint acc., if the banker knows the amt is held by the customer as trustee etc..

There

fore it can be inferred that, the moment an account is opened in the bank, a relation arises with the banker and the customer. It maybe of any kind and depends on the nature function the banker carries out

You might also like